U.S. risk council warns about asset managers, mortgage servicers

WASHINGTON, May 7 (Reuters) - The U.S. financial risk council on Wednesday raised red flags about new, potentially risky practices by asset managers and nonbank mortgage servicers, which they said are not regulated as carefully as banks.

The sectors were highlighted by the Financial Stability Oversight Council in a report that is expected to be published later on Wednesday, a government official who worked on the study said during a public meeting.

The council is a group of financial regulators established by the 2010 Dodd-Frank law. The group watches out for market risks and imposes additional regulation on large “systemic” firms whose collapse could harm the financial system.

The group issues a report every year that explores the landscape of financial activity and warns about new risks.

Previous reports mentioned activities by nonbank mortgage servicers and asset managers but did not detail the risks. This year, regulators are concerned that some traditional bank activities are moving to nonbank firms that are not subject to capital and liquidity requirements, said Joao Santos, an official with the Federal Reserve Bank of New York.

The focus on asset management activity will likely frustrate the industry, which has mounted a lobbying campaign amid concerns the FSOC might designate large firms such as BlackRock or Fidelity as “systemic” - a tag that would subject them to oversight by the Federal Reserve.

At issue are indemnifications asset managers offer some clients involved in securities lending activities to guard against the risk of borrower defaults.

That has raised questions about whether the asset managers should have tougher capital requirements, which banks must meet when they offer indemnification agreements.

For example, BlackRock disclosed in a November 2013 regulatory filing that it had indemnified $115 billion worth of securities-lending loan balances for clients as of September.

The issue could come up on May 19, when the FSOC hosts a public meeting on potential systemic risks posed by asset managers.

Similarly, Santos said, the report raised concerns about a shift in mortgage servicing activity to nonbanks.

Mortgage servicers handle borrowers’ accounts, processing payments and handling foreclosure proceedings. Some banks have sold servicing businesses following new rules by the Consumer Financial Protection Bureau, whose head is an FSOC member.

Nonbank servicers such as Ocwen Financial Corp and Nationstar Mortgage Holdings Inc have bought some of those businesses.

Officials who worked on the report also mentioned concerns such as threats of cyber attacks, the need for housing finance reform and risks posed by short-term wholesale funding. (Reporting by Emily Stephenson and Sarah N. Lynch; Additional reporting by Ashley Lau in New York; Editing by Karey Van Hall and Mohammad Zargham)